With this third CAT Newsflash since Monday the 14th of March, regarding the M9.0 earthquake offshore Japan, we want to give you an update on where we are with respect to assessing the effects of the earthquake on the Plenum CAT Bond portfolio.
CAT Bond market - We noted already last week that the CAT Bond market had fallen slightly due to the event, however since cat bond positions were marked to market on the day of the earthquake, pricing had not been fully adjusted to reflect the reactions of investors and traders to the event. Now, a week after the event, prices have declined much more as the market participants have now absorbed the extend of the disaster. The sharp drop in prices of some of the cat bonds in the market are reflective of a slowdown in trading  as investors and traders await the outcome for the cat bond transactions which are exposed to the event in Japan. With the cat bond market being bearish, the prices for cat bond transactions exposed to  perils other  than japan earthquake have also suffered slight price decreases.
CAT Bond Muteki - As explained in last week’s newsflash, the Plenum CAT Bond portfolio holds three positions which are exposed to japan earthquake. With the current information we have, amongst these positions, only one, a cat bond called Muteki, could potential be affected by the earthquake. The payout of that position is based on a parametric index which in turn is based on the weighted peak ground acceleration measurements, measured by measuring stations from the Japanese Kyoshin K-Net network located across Japan.
K-Net went offline for three days after the earthquake but is now back online. However, amongst the 1034 measuring stations, only 273 reported peak ground acceleration values. Taking only these 273 stations into account, Plenum’s portfolio managers calculated that the bond will not trigger.
For cat bond investors and traders, it is unclear however if the remaining stations have been lost or destroyed by the earthquake and tsunami and if they will report data in the next couple of weeks. It will therefore take additional time to clear the uncertainty around these measuring stations. Moreover, based on the limited information currently available, Plenum’s portfolio managers performed mathematical interpolations in order to assess the potential peak ground acceleration values for the stations which have not reported any values. The result of this mathematical simulation shows that if all measuring stations report values, the probability of the bond triggering will be high. This week’s performance impact of this position alone  is 85 basis points.
CAT Bond portfolio - The result of the situation described above is a downward price pressure for almost all cat bonds in the cat bond market this week. The Plenum CATBond portfolio being a subset of the whole cat bond market will suffer mark to market losses, with the downward price movements being the strongest for the three positions exposed to japan earthquake. The performance impact of non japan earthquake exposed bonds is about 1%.
It has to be emphasized however, that if none of the three bonds which are exposed to japan earthquake trigger, the Plenum CAT Bond portfolio will experience a sharp mark to market gain in the next couple of months.
We will update you as soon as more information becomes available.